Baby Monster Triplets

In addition to the Monster Hitman energy shooter, two additional SKUs will be available , being Lobo and Sniper. During last week’s conference call, Rodney Sacks (CEO) made the following comments regarding Monster Hitman:

“We are continuing with the rollout of Monster Hitman energy shooters in 3 ounce containers. We are in the process of launching two additional shooters in the same size containers. We have been successful in securing a number of retail listings for Hitman… An extensive launch of Hitman through the Coca-Cola bottlers is planned for March and April 2009. Gross sales of Hitman energy shooters in the fourth quarter were $10.9 million.”

Monster Energy hits Dutch shelves

Per Monster Energy’s distribution agreement with The Coca Cola Company (KO) and Coca Cola Enterprises (CCE), the dominant US energy drink is now available in The Netherlands. Spotted (see image below) at grocery store Albert Heijn (owned by Ahold, also the parent company of Stop&Shop, Giant, Martin’s and Peapod in the US), Monster comes in three variations for the European continent: Green (original) Monster, Blue Monster (Lo-Carb) and Monster Ripper (known in the US as M-80, the energy+juice variation). The top three US energy drinks are now all available in The Netherlands (and Monster also in the rest of the European CCE-territory):

• Monster Energy (all three SKUs, 500 ml) retails at  €2.98  ($3.87)  per liter (33.8 oz.), or $1.83 per 16 oz. can
• Red Bull (Regular and Diet, 473 ml) retails at  €4.00 ($5.20) per liter, or $2.46 per 16 oz. can
• Rockstar Energy (Regular and Juiced ) retails at €2.78 ($3.61) per liter, or $1,71 per 16 oz. can

Note that these are local grocery listings, and prices may vary across channels and regions. It looks like the 500 ml. can (16 oz. approximately) is becoming the new standard, moving away from the slim cans (250 ml. or 8 oz.).

The game is most definitely on,  now Monster is entering Red Bull’s back yard. Prepare for a serious test of both brands’ strength.

Hansen Natural Mid Quarter Update – December 16th 2008

This is an overview of the key remarks made during Hansen Natural’s (HANS) Mid Quarter Business Update on December 16th 2008, right after Rodney Sacks (CEO) and Hilton Schlosberg (CFO) rang the NASDAQ closing bell. The call is archived here, and was accompanied by a slide presentation.

Note that all references to sales figures and market share are from Nielsen and are not actual sales or statistics reported by Hansen Natural. There can be a discrepancy between the Nielsen figures and actual results reported by Hansen Natural.

• Monster Energy has been volume leader for some time now, and now regular Monster Energy (16 oz) is leading in unit sales as well, in the convenience channel (slide 10).
• Monster Ripper will be the name for Monster M-80 in overseas markets.
• Vidration is rolled out through some distributors, it is selling. In process to assess how much effort will be put into it. The category is price driven (discounting) recently, heavy promotions, putting pressure on margins, at levels that are not considered very attractive. 
• The growth of the entire beverage industry continues to slow, consistent with the general economy (housing declines, unemployment). Consumers cut back on impulse drink purchases at gas stations, which is the most important channel for energy drinks. This trend, seen nationwide, is most marked in California, an important energy drink market. Blue collar workers are disproportionately affected. Any increase in spending (as falling gas prices might free up some additional disposable income) by consumers is expected to be moderate, given current economic uncertainties.Although many beverage categories are displaying negative growth, the energy category is continuing to grow, albeit at a slower rate. The Monster brand continues to grow in excess of the category and continues to generate the majority of additional dollars earned by the category.
• According to the Nielsen report for the 13 weeks through November 22^nd 2008, the category in all outlets combined (grocery, drugs, gas, convenience, mass market excluding Wal Mart) grew 7.6%, or $85.8 mln, to a total of $ 1.2095 bln. Monster Energy contributed $45.1 mln, of which $17.5 from Monster Java. Market share for Monster Energy excluding Java is 25.9%, up 2%. Monster sales were up 15.5%, compared to 2.4% for Red Bull. (Figures given during the previous mid quarter update on September 23rd 2008 can be found here)

• Growth of the energy category in the convenience & gas (C&G) channel (13 weeks ended November 22^nd 2008 ) was 7.8%. According to Nielsen, sales through the convenience & gas channel accounted for 81.6% of energy drink sales.
• For Canada, energy drink growth in the C&G channel is 16%. Monster is both in Canada and Mexico the #2 brand, growing in excess of the category.
• Monster Java represents about 10% of total gross sales of Monster.
• Sales to customers outside the US amounted to $31.1 mln. for Q3 2008, compared to $13.9 mln in Q3 2007. For the nine months ended September 30 th 2008 such sales totaled $79.4 mln, as compared to $40.4 mln in the same period in the previous year. These figures include sales made to the military channel that are shipped overseas: prior to Q3 2008 these were included in domestic sales, and are now reclassified as sales to customers outside of the US.
• Expected to benefit from reduction in the costs of certain raw materials, primarily apple juice, aluminum, milk and sugar. Although dairy prices increased in the course of the third quarter, the milk component has decreased. Currently HANS is negotiating can supply for 2009 and expects to benefit from reductions in aluminum prices, although not to the full extent due to certain hedges. Can prices, though are expected to be lower in 2009 than in 2008.
• Since the Q3 earnings conference call , HANS repurchased 2.169 mln shares at an average price of $24.66. Under the current repurchasing program the company is authorized to buy back another $95.534 mln worth of shares (of a total of $200 mln). Intent to implement the plan going forward.
• The majority of the transition of Monster distribution to Coca Cola Enterprises distributors, other Coke distributors and some new AB distributors was completed in November. The transition in Canada from PespiCo to Coca Cola Enterprises is scheduled for January 2009.
• The new distribution deal in Mexico with Jumex should improve performance in smaller markets and accomplish more extensive penetration, especially to the smaller stores. The Jumex agreement is due to commence towards the end of January 2009. Additional opportunities through Jumex for other markets in Central America, where Jumex has a lot of their own direct distribution in place.
• Auction rate securities stand at a fair value of $109 mln per December 12^th 2008, from $124 mln on June 30^th 2008 and $111.4 mln on September 30^th 2008, including a $5.4 impairment charge (temporary), creating a tax benefit of $2.1 mln.
• The transition of the distribution of Monster to the Coke system in the UK is deferred to the beginning of January 2009.
• Performance of the independent distributor of Monster in Spain is a little disappointing and is being reviewed; other distribution opportunities in Spain are being evaluated.
• The rollout of the energy shooter Monster Hitman is on track, and HANS expects to launch two additional 3 oz. SKUs in coming weeks into the new year. For Q1 or Q2 2009 HANS expects to launch a completely new line of Monster Energy drinks. Not just an extra flavour, but a new beverage concept (based on “some new technology”). Sacks commenting on it that it’s been quite a challenge to get equipment to run this line and get the right quality, but they have now succeeded to get it right.
• On international expansion: focus now is on digesting the launch in new European markets with CCE distribution and a population of some 200 mln (“ 2/3 of the US population” ), rolling out in the coming 3-4 months. Also looking at potential opportunities in South America, with a little bit more time to gear up for the summer season which starts in September. On an opportunistic basis Monster Energy is already selling in the South American market, but there will now be put more emphasis on building it, approaching it like the European market, putting more effort, time, personnel and marketing behind it.
• Looking into going into Australia, “pretty advanced in the Australian market”. HANS settled a trademark issue and now has the rights for the Monster brand in Australia, New Zealand, Hong Kong, Singapore (and either Indonesia or Malaysia).
• European market: C&G channel not as big as in the US, but more business in standard grocery stores, more sales in cafes, small stores and kiosks. Compared to the US, margins are expected to be not as rich, because of different distribution systems (more layers). And it will take some time to ramp up sales and get the benefits of larger volumes. Emphasizing that it’s important to “set the brand” in new markets, from a promotion perspective (spending ahead), before actually launching the product (e.g. Monster’s sponsorship of a Moto GP team).

Energy shots: a niche gets noticed

 

With the announcement of Red Bull to launch an energy shot in 2009, all big energy drink brands (Monster Energy, Rockstar, Full Throttle, Amp) have entered this emerging niche, and thereby validating its potential and relevance. Sales for Monster’s energy shot Hitman grossed $3 mln in the last 2-3 weeks of the third quarter, as it was launched mid-September.

 

As another sign of strength: NACS, a tradegroup for convenience and gas retail channels, has “developed a new subcategory in Health and Beauty Care (HBC) called Liquid Vitamins, Supplements & Energy Shots (4 oz. or less) to differentiate sales volume and growth in energy shots from Vitamins and Supplements (non-liquid).”…” Increasing sales volume in energy shot products has created a sense of urgency for proper categorization and sales attribution for NACS State of the Industry data. “

 

From a more anecdotal point of view, the traffic statistics of this blog also tell a little story. The traffic stats show what search queries led people to this blog: some 63% of search terms are related to Monster Hitman and energy shots. And a little post on the introduction of Monster Hitman has gotten the most … well… hits, by far. Makes me wonder who my audience is…

Hansen Natural Gross Margin Watch

 

In the coming quarters Hansen Natural’s (HANS)  gross margin (gross profit divided by net sales) could benefit from several developments, but there could be some pitfalls as well. On average, Hansen Natural sells a 16 oz. can for about $0.82 (net sales), at a cost of $0.40. In the four trailing quarters, Hansen Natural sold the equivalent of 1.24 bln 16 oz. cans of (mostly) Monster Energy, sodas, juices and teas. The chart below visualizes the development of proceeds and costs per can over the last 2.5 years, accompanied by a table, providing more detail.

 

 

 

 

Let’s look at some positives and potential negatives for Hansen’s gross margin mix.

 

 

Gross margin positives

 

• Commodity prices have succumbed to gravity lately, and are not likely to rebound soon, especially not to their recent highs. This should have a positive impact on Hansen’s input prices (e.g. aluminum, high-fructose corn syrup, milk, coffee, juice – see charts at the bottom of this post), depending on contract terms.
• Lower-margin Java Monster, while benefitting from lower input prices itself (but still at below average gross margin), will play a smaller role in the whole product mix, as higher margin Monster Energy (Regular and Lo-Carb)  will be distributed in European markets, starting Q4.
• Monster Hitman, though probably not a big contributor in absolute terms, is expected to have above average margins; derived from the main Monster drink, coming in a smaller quantity, Hitman currently sells for $2.30 on Ebay. Hitman will at least mitigate some of the lower margin on Java.
• The price increase on Regular Monster 16 oz. of 6% and on Monster Java of 12%-13% in the beginning of the year, could still have a positive effect in the current quarters. Gross sale price (before promotional allowances) per can  was $0.90 in Q4 2007 (before the price increase), $0.91 in Q1 2008 (not much impact, because resllers built up extra inventory at old prices) and $0.94 in Q2 2008 (+4.4% compared to Q4 2007).

 

 

Gross margin negatives

 

• The difference between gross sales and net sales are the “promotional allowances”, expenses made by Hansen Natural to provide retailers with displays, coolers, discount promotions. As Monster is entering new markets, through their recent deal with Coca Cola Enterprises (CCE), promotional allowances could go up, without off-setting sales (at least in the beginning). This could potentially put some temporary pressure on gross margin.
• At what price point Monster will be sold in Europe is still to be seen. At current FX rates, an 8 oz. Red Bull sells in grocery for about $1.60 in the Netherlands; Monster 16. oz  should come at a similar price point if it sticks to its US pricing strategy vs. Red Bull. In the end it all depends on how Hansen Natural, Coca Cola Enterprises and the retailers divide the margin and what mark-up satisfies all parties.

 

The gross margin negatives are either of a temporary nature or largely unknown. The positives have more substance and staying power, resulting in a net positive outlook for gross margin. Note that with a 38% tax rate, each 1% increase in gross margin adds 0.62% to net margin. As a reminder,  talking about margins only make sense if they’re backed by solid absolute dollar sales (or euros, or pound sterling…).

 

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Commodity Charts (from barchart.com)

 

 

 

 

 

 

 

 

 

 

Taste counts, but distribution rules

 From today’s PEP-report (emphasis added): 

• “North American carbonated soft drink (CSD) volume declined 3 percent due to category softness. Trademark Mountain Dew volume grew low-single-digits, partially offsetting a mid-single-digit decline in our other CSD brands. In non-carbonated beverages, volume was down 5 percent, reflecting double-digit declines in unflavored water and Propel. Despite a low-single-digit volume decline, trademark Gatorade gained 1.4 points of share in the sports drink category. The North American energy drinks portfolio continued to perform well, moving into the number 3 spot in measured channels led by strong growth in AMP energy drink and Starbucks Energy Coffee. Tropicana Chilled Juices grew mid-single-digits, while SoBe Life Water continues to build trial and repeat purchase on strengthened consumer awareness and broader distribution.”

Below are the Nielsen numbers per mid-quarter update (from HANS). According to the PEP report Amp & Starbucks Energy combined surpassed Rockstar. With the ho-hum distribution extension until end of 2009 with Coke, Rockstar will have a hard time fighting off PEP’s energy drinks. Taste counts, but distribution rules.

Building an Empire – Prefab Style

 

Monster Energy’s international build-up seems to be getting some serious traction, after yesterday’s announcement that Hansen Natural (HANS) – Monster’s parent company –, The Coca Cola Company (KO) and Coca Cola Enterprises (CCE) signed a distribution agreement (additional financial information here). Covered markets will include selected territories in the U.S., Canada and six Western European countries (including mini states Luxembourg and Monaco).

 

Earlier I mentioned how Monster Energy might be falling behind in international markets versus Rockstar Energy. And although Hansen’s CEO Rodney Sacks characterized Monster’s  international progress as “Rome wasn’t built in one day”, this deal with Coke looks a lot like empire building prefab style. Opening up several new markets and having access to the Coke system of bottlers and distributors is a major step and emphasizes Monster’s proven brand strength.

 

The table below shows new international markets where distribution has recently commenced or is imminent (with population size and GDP per capita). The countries of France, United Kingdom, The Netherlands, Belgium, Luxembourg and the city-state of Monaco fall under the new Coke agreement. The French market is especially interesting, since arch rival Red Bull has only been allowed distribution since this spring, making it the only big western market where Red Bull (apart from its reputation) doesn’t have as much of a headstart as in other countries.

 

 

Now new markets almost outnumber the U.S. domestic market when it comes to population. Monster Energy has been distributed for some time already in Canada (pop: 33.4 mln; GDP/capita: $38,400) and Mexico (pop: 106.7 mln; GDP/capita: $12,800). Note that about 25% of HANS sales still comes from California, even though Monster represents about 90% of their sales.

 

For developed countries the market for energy drinks is roughly estimated to be $10 per capita at a manufacturing /wholesale level, at which Hansen Natural operates. Although no market is the same, and Monster’s success shouldn’t be extrapolated 1:1 to these new regions, these new markets alone present a $2.5 bln opportunity. Who needs Rome…

 

 

 

 

Hansen Natural: Distribution Chatter – Then and Now

Interestingly (though meaningless), with the recent Coke distribution rumors, HANS is trading at similar levels as 2.5 years ago when chatter around a  HANS-BUD deal arose (Click chart to enlarge). At that time it was also Beverage Business Insights that had the scoop…

  

BUD Chatter March 31st 2006

http://theflyonthewallblog.blogspot.com/2006/03/through-theflys-eyes-anheuser-busch.html

 

BUD Deal May 9th 2006

http://findarticles.com/p/articles/mi_m0EIN/is_2006_May_9/ai_n26854731

 

KO Chatter September 18th 2008

http://www.reuters.com/article/marketsNews/idINBNG36128320080918?rpc=44

 

KO Deal …. ?

Hansen Natural Mid-Quarter Update – September 23rd 2008

This is an overview of the key remarks made during Hansen Natural’s (HANS) Mid Quarter Business Update on September 23rd 2008.

 

Note that all references to sales figures and market share are from Nielsen and are not actual sales or statistics reported by Hansen Natural. There can be a discrepancy between the Nielsen figures and actual results reported by Hansen Natural. 

 

• Consumers cut back on impulse drink purchases at gas stations, which is the most important channel for energy drinks. This trend, seen nationwide,  is most marked in California, an important energy drink market. Blue collar workers are disproportionately affected. 
• Monster brand continues to grow in excess of the category. In all outlets combined (grocery, drugs, gas, convenience, mass market excluding Wal Mart) for the 13 weeks ending August 23rd 2008, the energy category as a whole grew 11.5%, or $133 mln for a total of  $1.29 bln. Monster Energy accounted for $85.2 mln of the category growth. 

 

 

                             

•  Monster Java contributed $52 mln in sales for the 13-week period.
• Measured in units sold, Monster is selling as many units as Red Bull in the convenience channel.
• Monster share of the category, excluding Java, is 25.8%, +2.6%. Excluding Java, Monster Energy sales are up 17.5% in dollar terms.
• The table below presents sales per point in G&C channel, 13 weeks ending August 23rd 2008 for “flagship” or best-selling SKU per brand, plus Monster Lo-carb and Monster Java. Note that the Red Bull number does not include newer larger-size offerings of 12 oz. and 16.9 oz. The sales per point for Monster Java are double the sales per point of  Rockstar Roasted. 

 

                                              

 

•  For the 12 weeks ended September 6th 2008 in convenience channel, the RTD coffee category grew 36%. This was largely fueled by the entry of energy-coffee hybrids (Monster Java, Rockstar Roasted, Full Throttle and Starbucks Coffee & Energy). Enhanced waters were up 19.8%, refridgerated juices 4.8%. Carbonated beverages were flat, yoghurt/milk, bottled water and RTD teas were negative.
•  Distribution in convenience channel for regular Monster stands at 92%, for Lo-Carb at 82%, followed by Khaos (72%), Assault (61%), M-80 (55%) and Mixxd (44%). Monster 24 oz. stands at 55%. For the several Java SKU distribution penetration ranges from 27% to 65%. 
• In the on-premise channel, Monster now has over 15,000 accounts nationwide (of  some odd 250,000). These sort of accounts require additional investments to set-up (compared to off-premise), in terms of promotion and rebates. Sacks noted that they serve a lot of smaller accounts. 
• Mexico: (all outlets, June/July 2008) energy drink category grew 36.4%. Monster’s market share is  21.3%  and sales are up 155.8%.
• Canada: (C&G channel, September 2008) energy drink category grew 28%. Monster’s market share is 13.7% and sales are up 36%.
•  After UK, Ireland, Spain and Sweden, Monster energy is in the process of entering additional international markets: New Zealand and Australia. ( Author’s remark: interestingly there already is a company selling an energy drink under the Monster Energy name in Australia, which Hansen Natural has been fighting in court.)
• Roll out of Hitman   has commenced in the last two weeks. It’s expected that gross margin on this energy shot will be equal or higher than regular Monster.
• Auction rate securities are being redeemed bit by bit.
• No comments on progress of share buyback.
• Questions about the Coke rumors were obviously met with a  “we can’t comment on that”.

 

 

Hansen Natural: “A hold isn’t an option”

A hold isn’t an option: this is how Maverick Capital’s Lee Ainslie views his hedge fund’s investments (size: $10 bln) . One of those investments (of about 100 positions) is Hansen Natural (HANS):

 

“This is how I’ve come to think of it over the years: Either this security deserves incremental capital at the current price point or it doesn’t — in which case, let’s sell it and put the money to work in a security that deserves that incremental capital.”

 

Maverick’s position in Hansen Natural was built from scratch during Q2 2008. Although SEC-filings show a 5.7 mln share position, Maverick somehow never filed a SC 13G form to report a stake of 5% or more. Let’s look at some of the larger holders: Lone Pine Capital, Eton Park and Maverick Capital are hedge funds, that built their postions during Q2. Trian, as mentioned in a previous post, is the fund of activist Nelson Peltz’s. APG, one of the world’s largest pension funds, from the Netherlands, also build up a position, and naturally has a longer-term broad based investment approach.

  

 

                                              * From SC 13G filings after the end of Q2 2008

 

As of June 30 2008, Hansen Natural has 92 mln shares outstanding. It will take another six weeks before 13F-HR reports for Q3 are to be filed, and we’ll see how these positions have evolved. And see what “a hold is not an option” means for Hansen Natural.